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Q: 5. What are the advantages of Value Added Tax (VAT)?

Ans. Value Added Tax (VAT) has several advantages:- It provides a stable and sustainable source of tax revenue for the government.- It reduces the tax burden on low-income individuals as VAT is generally a proportional tax.- It promotes transparency and accountability in the tax system.- It encourages formalization of the economy as businesses need to register for VAT.- It allows for tax credits on inputs, which incentivizes businesses to invest and grow.- It is relatively easy to administer and enforce compared to other forms of indirect taxes.

There are several methods to calculate the “value added” to the goods for levy of tax. The 3 commonly used methods are:

Addition Method
Subtraction Method
Direct subtraction Method
Indirect/Intermediate subtraction Method
Invoice Method

S.N.	Method	VAT Liability	Value Added means	Popularity of the method
1	Addition Method	Value Added X Tax Rate	Factor payments + Profit	Hardly used
2	Subtraction Method	In General:Sales – Purchases	Hardly used
1. Direct Subtraction method	Value Added X Tax Rate	Aggregate value of sales (exclusive of tax) – Aggregate value of purchase (exclusive of tax)
1. Indirect Subtraction/Intermediate Subtraction method	Value Added X [Tax Rate/(100 + Rate)]	Aggregate value of sales (inclusive of tax) – Aggregate value of purchase (inclusive of tax)
3	Invoice Method	Tax on Sales – Tax on Inputs	Widely used

Demerits of Addition method:

No set off or tax credit
Not possible to detect tax evasion
Profit margin is transparent
Does not easily accommodate exemptions of intermediate dealers

Demerits of Subtraction method

No set off or tax credit
Tax payable is calculated periodically and not invoice-wise
Not showing tax amount in invoice is not healthy practice
Inconsistent when the rate of tax is different

Invoice Method – Merits

Common and popular method
No tax evasion
No Revenue Loss
Beneficial for the industry and trade.
Profit margin is not known to competitor and customer

Note: There are bill traders in the market who issue “fake/bogus invoices” for consideration. An unscrupulous dealer may use such invoices to claim ITC (input tax credit).

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FAQs on Methods of Computing Value Added Tax (VAT) - Indirect Tax Laws - Indirect Tax Laws - B Com

1. What is Value Added Tax (VAT)?

Ans. Value Added Tax (VAT) is an indirect tax levied on the value added at each stage of production or distribution of goods or services. It is based on the consumption of goods or services and is ultimately borne by the final consumer.

2. How is Value Added Tax (VAT) computed?

Ans. Value Added Tax (VAT) is computed by multiplying the tax rate with the value added at each stage of production or distribution. The value added is calculated by subtracting the cost of inputs from the selling price of the goods or services.

3. What are the methods of computing Value Added Tax (VAT)?

Ans. There are two methods of computing Value Added Tax (VAT): the invoice or credit method and the subtraction or deduction method. - The invoice or credit method involves calculating VAT based on the invoices issued and received during a specific period. The VAT payable is the difference between the VAT on sales (output VAT) and the VAT on purchases (input VAT). - The subtraction or deduction method involves calculating VAT by subtracting the VAT paid on purchases from the VAT collected on sales during a specific period. The VAT payable is the difference between the two amounts.

4. How does Value Added Tax (VAT) help in tax administration?

Ans. Value Added Tax (VAT) helps in tax administration by providing a transparent and efficient system for collecting tax revenue. It reduces the cascading effect of taxes as it is levied only on the value added at each stage. VAT also encourages compliance as businesses are required to maintain proper records and submit regular VAT returns.

5. What are the advantages of Value Added Tax (VAT)?

Ans. Value Added Tax (VAT) has several advantages: - It provides a stable and sustainable source of tax revenue for the government. - It reduces the tax burden on low-income individuals as VAT is generally a proportional tax. - It promotes transparency and accountability in the tax system. - It encourages formalization of the economy as businesses need to register for VAT. - It allows for tax credits on inputs, which incentivizes businesses to invest and grow. - It is relatively easy to administer and enforce compared to other forms of indirect taxes.

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